No Laughing Matter: Deadlock Dissolution Petition Targets Legendary NYC Comedy Club
March 30, 2020
The Comic Strip is the oldest stand-up comedy showcase club in New York City. Its co-founders Robert Wachs and Richard Tienken opened the club in 1975 on Manhattan’s Upper East Side. Over the last 45 years a veritable who’s who of the comedy world has performed on its stage, including George Carlin, Eddie Murphy, Richard Pryor, Chris Rock, Jerry Seinfeld, Robin Williams, and the list goes on.
Off stage, however, things are not so funny.
In the wake of co-founder Robert Wachs’ death in 2013, litigation broke out over the club’s finances and management between Tienken and Wachs’ widow, Tess Wachs, who succeeded to her husband’s 50% ownership of the corporation, Comic Strip Promotions, Inc. Over a four-year span, a half dozen or so legal proceedings have bounced back and forth between arbitration and court, much of which is omitted in the following description.
The Opener: Books and Records
Ms. Wachs fired the first shot in March 2016 when she filed a petition to inspect books and records. Her petition alleged that she received no distributions and minimal information since becoming a shareholder. Tienken resisted on the ground that Wachs lacked standing in the absence of evidence that she inherited her husband’s shares under his will, as permitted by the 2010 Shareholders’ Agreement. In June 2016, the court granted the petition and ordered production of books and records.
The Middle: Arbitration
In July 2016, Ms. Wachs commenced an arbitration against Tienken seeking damages for breach of fiduciary duty, breach of the shareholders’ agreement, etc., as well as declaratory and injunctive relief enforcing her co-equal voting and management rights as 50% shareholder. The arbitrator issued an award in February 2017 in which he summed up the evidence as presenting:
an all too familiar situation arising out of a long-standing founder run business corporation upon the death of one of the founders. Exacerbating this situation is the underlying business has only general by-laws and a very narrowly drawn Shareholders Agreement focused on life insurance policies and succession rights, but providing no guidance on the operations of the business or general governance provisions. There has been no history of the Corporation maintaining financial statements beyond the annual tax returns. Given that the business has been operated until more recently with a significant cash component to both income and expenses without standard controls or records, it is very difficult for either party to establish with reasonable certainty that all revenues and expenses have been properly documented or accounted for. It is clear from the tax returns in evidence that revenues and expenses have been substantially and consistently underreported.
The award denied all of Ms. Wachs’ damages claims but agreed that she has “equal votes in determining the management and operations of the Comic Strip” and ordered the parties within 30 days to hold a shareholders meeting to elect directors followed by a board meeting to appoint officers with full authority to operate the business. The arbitrator went on to state, in what became fodder for subsequent litigation, that if the parties were unable to elect directors and officers, and to otherwise agree on management of the club,
I find on the record before me that there currently exists sufficient evidence of such internal dissension between the two shareholders that dissolution of the Corporation would be beneficial to the shareholders pursuant [to] the New York Corporation Law § 1104 and that my finding of such in this arbitration may serve as a basis for either 50% shareholder to petition the Court to confirm this Award and order such relief.
Ms. Wachs subsequently filed a court petition to vacate the above finding as outside the scope of the arbitration; to vacate the award’s denial of her damages claims; and otherwise to confirm the award. Her petition noted that no directors or officers were elected at the meeting ordered by the arbitrator. Tienken cross-moved to confirm the award.
In August 2017, Justice Charles E. Ramos (since retired) gave short shrift to Ms. Wachs’ argument and confirmed the award in its entirety. In October 2017, in response to a follow-up request by Ms. Wachs for further relief, Justice Ramos recommended that the parties re-open the prior arbitration to resolve their inability to elect a board and appoint officers.
Which is exactly what happened, leading to a Supplemental Award by the same arbitrator in February 2018. In it, he directed the shareholders to hold a meeting and to elect each other as members of the Board. But he stopped short of directing them to appoint each other as officers, finding that the provision in the Shareholders’ Agreement whereby Tienken and Robert Wachs agreed to do so did not survive the latter’s death. The award closed with a scaled-back version of the original award’s advisory opinion concerning dissolution:
If the shareholders are unable to agree on the election of directors and officers, such division and dissention will result in deadlock and Tienken and Tess Wachs may proceed with their statutory rights under such circumstances based on this finding.
Almost a year later, complaining that Tienken was still exercising exclusive control over Comic Strip’s management, Ms. Wachs petitioned to confirm the Supplemental Award. In July 2019, Justice Marcy Friedman granted the petition and confirmed the Supplemental Award.
The Headliner: Dissolution
Recall that in her petition to vacate parts of the initial arbitration award, Ms. Wachs complained to no avail that the arbitrator had exceeded his powers when he found that there existed internal dissension; that dissolution would be beneficial to the shareholders under the deadlock dissolution statute; and that his finding could serve as a basis for either 50% shareholder to petition the court to award such relief.
In October 2019, Ms. Wachs reversed course and petitioned under BCL § 1104 for judicial dissolution of the corporation based on the alleged, ongoing inability to elect officers and the “acrimonious and irreconcilable” differences between Ms. Wachs and Tienken “prevent[ing] adequate and satisfactory management of the affairs and property of the Comic Strip.”
Tienken opposed dissolution and sought dismissal of the petition for failure to state a valid claim. Tienken argued in his opposing affidavit that there was no deadlock since he remained the sole director and Ms. Wachs had not asked for a vote of directors. He also contended that under his management the company, which had little by way of tangible or intangible assets, was digging itself out of about $500,000 in debt and therefore dissolution would not benefit the shareholders.
In her reply affidavit, Ms. Wachs contended there was director deadlock in that she was elected director at an unusual February 2018 meeting, held a few days before the arbitrator issued his Supplemental Award, attended by her alone at her apartment, at which she alone voted. By way of explanation, Ms. Wachs contended that she moved the meeting to her apartment because she was locked out of the Comic Strip where the meeting was noticed to be held and because Tienken had failed to show.
The case was assigned to Manhattan Commercial Division Justice Andrew Borrok. In a Decision and Order dated January 10, 2020, Justice Borrok ruled that the parties’ conflicting affidavits raised factual questions necessitating a hearing:
Dissolution of a company is a drastic remedy and should be considered as a last resort. This may be particularly true where from the record it appears that the financial management of the corporation had been conducted somewhat loosely from the inception and there has been a history of failure to observe corporate formalities. Because dissolution is considered to be an option of last resort, ordering such relief without a factual hearing is precipitous. This is particularly true where, as here, the parties submit conflicting affidavits which raise factual questions as to the merits of the petition and the appropriate remedy. Here, a hearing is necessary to determine these issues. Therefore, this matter is referred to a Special Referee or JHO to hear and report with recommendations on whether the shareholders of the Comic Strip have reached a deadlock or one of the grounds set forth in BCL § 1104 has been established, and whether dissolution would be beneficial to shareholders. [Citations and internal quotation marks omitted.]
Ms. Wachs subsequently moved to reargue the decision, contending that Justice Borrok “overlooked” the law that the arbitration clause in the Shareholders’ Agreement renders dissolution arbitrable and that the arbitrator had already determined that deadlock existed based on the shareholders’ inability to appoint officers — in other words, that Justice Borrok was compelled to find the conditions for dissolution satisfied under principles of res judicata.
Justice Borrok denied the motion, writing in a Decision and Order dated February 5, 2020, that the arbitrator’s Supplemental Award:
only provides that, if the shareholders are unable to agree on the election of directors and officers, such division and dissention will result in deadlock and Tienken and Tess Wachs may proceed with their statutory rights. In other words, contrary to what the petitioner argues, the arbitrator did not find that deadlock mandated dissolution. [Italics in original.]
Justice Borrok did clarify one aspect of his prior decision, insofar as it cited BCL § 1104-a, the statute authorizing a minority shareholder to seek dissolution based on the majority’s oppressive conduct, in support of the court’s statement that it could order a buyout in lieu of dissolution. Justice Borrok corrected himself, writing:
[U]pon review of the underlying petition, the court notes that the instant petition was brought pursuant to BCL § 1104, not BCL § 1104-a. Whereas the court has discretion to fashion a less drastic remedy to dissolution under BCL § 1104-a, such relief is not available under BCL § 1104. . . . [T]he decision is clarified to strike the aspect of the reference to the Special Referee as to whether a less drastic remedy would be appropriate as the petition was brought under BCL § 1104 and not BCL § 1104-a.
As I write this the Comic Strip and the courts (except for essential matters) are closed indefinitely due to the COVID-19 crisis, so I don’t expect to see any developments in this case for a while. In the meantime, the history thus far of Wachs v Tienken provides food for thought:
- Robert Wachs died at the age of 73, only a few years after he and Tienken entered into what the arbitrator described as a “narrowly drawn” shareholders’ agreement. Wachs was an experienced entertainment lawyer whose will bequeathed his 50% ownership in the Comic Strip to his wife. She had no involvement in managing the business before her husband’s death and was at a predictable disadvantage doing so after his death, especially given the club’s historically poor accounting and cash controls. Wachs would have been well advised to include in the shareholders’ agreement a provision for redemption of a deceased owner’s shares funded by life insurance, or perhaps a mandatory purchase of the deceased owner’s shares by the surviving owner with a long-term payout. Ms. Wachs’ inheritance so far seems to consist mostly of large legal bills.
- Ms. Wachs held off almost six years from the time of her husband’s death before seeking judicial dissolution. According to her own pleadings, the entire time she was frozen out of management and received not a penny in distributions. I have to assume that her strategic goal all along was to induce Tienken to buy out her 50% interest at a fair price, in which event the “nuclear option” of a threatened dissolution is usually the most powerful inducement. Why she didn’t seek dissolution on day one, and do it in arbitration as allowed by the shareholders’ agreement, is a mystery.
- Justice Borrok’s closing clarification in his most recent decision denying reargument highlights the important distinction between the shareholder oppression (BCL § 1104-a) and deadlock (BCL § 1104) dissolution statutes. Only the former triggers the non-petitioning shareholder’s right to elect to purchase the petitioner’s shares for fair value or, alternatively, authorizes the court to enter a conditional order of dissolution allowing the non-petitioner to avoid dissolution by such purchase. Ms. Wachs as a 50% shareholder could have sought dissolution under either or both statutes. She chose to proceed under § 1104 alone even though many if not most of her allegations against Tienken sound in oppression, not deadlock. Sometimes that’s the wiser choice for getting the best possible buyout deal. Only time will tell if Ms. Wachs made the right choice.